The following table shows a money supply M2 + in billions of dollars, a real GDP in billions of dollars of 2012 and a GDP deflator base 100 = 2012 in Canada (Statistics Canada, 2020d

Economics Dec 17, 2020

The following table shows a money supply M2 + in billions of dollars, a real GDP in billions of dollars of 2012 and a GDP deflator base 100 = 2012 in Canada (Statistics Canada, 2020d.a). Quarter M2+ Real GDP Price Index 1971 3 53.5 603.2 17.2 a. What is the velocity of money? Round your answer to the nearest second decimal. b. According to the neutrality of money, if the money supply doubles. what should be the new price index? C. According to the neutrality of money. If the money supply doubles, what should be the new real GDP?

Expert Solution

a) Velocity of money = real GDP * price index / money supply

= 603.2 * 17.2 / 53.5

= 193.93

b) Money is neutral when any increase in money supply brings proportionate increase in price level, leaving real GDP unchanged. Hence price index is doubled to 34.4

c) New real GDP is unchanged at 603.2 billion

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